Hedge fund hit with record insider-trading settlement; others warned

A record $1.8 billion insider-trading settlement announced Monday between a Wall Street investment giant and a branch of the Justice Department included a warning that nobody in the global financial capital is “too big to jail.”

“The aggregate $1.8 billion financial penalty is – to the government’s knowledge – the largest financial penalty in history for insider trading offenses,” Preet Bharara, the U.S. attorney for the Southern District of New York, said in a settlement document with SAC Capital Advisors LP sent to two presiding federal judges

Later, in an afternoon news conference to announce the settlement with the hedge-fund group, Bharara made it clear that his office has its eyes on others and sent a warning to Wall Street, referencing a line from the 1987 movie “Wall Street.”

“Greed, sometimes, is not good,” he said.

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“Whether the misbehaving corporation is a hedge fund or a commercial bank,” he added, no one should think that it’s “too big to jail.”

That set off speculation about who else might be in the crosshairs of an aggressive U.S. attorney. Just last month, Bharara’s office won an important jury conviction against former executives of Countrywide, the mortgage lender purchased by Bank of America, which had fought the case.

SAC is owned by investment magnate Steven A. Cohen. As part of the deal that still needs a judge’s approval, his company would stop investing on behalf of others. It could operate only as a “family office,” meaning Cohen could invest only his substantial family money going forward.

Cohen himself wasn’t charged, but he remains the subject of an investigation by the Securities and Exchange Commission. On July 19, the SEC’s enforcement division charged Cohen with failing to supervise two senior portfolio managers, Mathew Martoma and Michael Steinberg. Through illegal trades of pharmaceutical stocks, Cohen’s hedge funds earned profits or avoided losses of more than $275 million and Cohen gave Martoma a $9 million bonus, the SEC said.

Hedge funds are private investment pools for the uber-wealthy. They generally require huge minimum sums from a small number of rich investors, who seek so-called alpha returns, which eclipse what could be earned through conventional investing in the stock and bond markets. Under the revamp of financial regulations in 2010, hedge funds were required to register with the SEC for the first time.

At its peak, SAC had more than $15 billion worth of assets under management, and it’s thought to still have more than $9 billion in assets under management. That’s why groups that advocate on behalf of individual investors applauded Bharara for going after a big fish.

“They’ve gone after a big hedge fund. Big is not immunity,” said Bartlett Naylor, a financial policy advocate for Public Citizen.

Monday’s settlement would cost SAC $1.184 billion on top of $616 million that company defendants already have agreed to pay the SEC.

SAC has maintained that insider trading wasn’t widespread at the firm, and it issued a statement repeating that.

"We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years,” the statement said. “SAC has never encouraged, promoted or tolerated insider trading.”

In the original indictment of SAC, the U.S. attorney told the opposite story, citing “institutional practices that encouraged the widespread solicitation and use of illegal inside information.” It also called that insider trading “substantial, pervasive and on a scale without known precedent in the hedge fund industry.”

Bharara noted that the settlement was only with his office and didn’t preclude further legal action from other state or federal prosecutors or regulators, or against others within SAC.

Bharara is the former chief counsel for U.S. Sen. Charles Schumer, D-N.Y.

Cohen historically has been a big contributor to Democratic candidates but he began giving more to Republicans during the debate over the landmark 2010 legislation that put new curbs on the financial sector.